News is good for commercial real estate: CoStar says office markets have bottomed

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Print this page by Paula C. Squires

In a mid-year report, CoStar Group says that fundamentals in U.S. office markets appear to have stabilized and are headed toward recovery.

In its State of the U.S. Office Market: Mid-Year 2010 Review & Forecast, Bethesda based CoStar, a real estate research firm, confirmed positive net absorption in many markets (the net change in occupied space over a given period of time). Plus, it said office vacancy rates appear to have peaked and are no longer rising.

“As we anticipated two quarters ago, it now appears we have hit the bottom of the market in terms of vacancy and that is critical here in this business,” said Andrew Florance, CoStar’s CEO. Florance, though, acknowledged conflicting reports on the market’s performance, with some sources still reporting an uptick in vacancy rates.  “I saw something the other day saying that vacancy rates were still going up and were expected to continue to do so for another year or more. I think that is just wrong,” Florance said in statements issued with the report. 

Of the 20 largest office markets, CoStar says eight posted positive net absorption so far this year, three had little or no change and nine posted negative net absorption. Leading the way in the absorption of office space was metropolitan Washington, D.C. — which includes Northern Virginia — with 2 million square feet of net absorption.

The expansion of federal agencies has boosted that market, one of the few that has seen an increase in asking rental rates. Jones Lang LaSalle documented that trend earlier this week in a second-quarter market review. It said office vacancy rates for the Washington metro area dropped from 16 percent in the first quarter to 15.6 percent at the end of the second quarter.

“A shift from the planning stages of stimulus and regulation initiatives to full-scale implementation yielded robust gains for the metro DC market in the first half of 2010,” said Scott Homa, research manager for the mid-Atlantic region. “This growth offset a large portion of the oversupply that resulted from excessive speculative construction over the past few years.”

Washington’s vacancy rate compares to 12.3 percent in Richmond and 12.8 percent in Hampton Roads — Virginia’s two other major markets for commercial real estate — based on CoStar figures. Other sources put Washington’s rate as low as 10 percent.

The rates for all three of Virginia’s regions are far below a national office vacancy rate of 17.4 percent, the highest level since 1993, according to Reis Inc., a New York-based research firm.

CoStar said two economic trends are helping office markets rebound. First, there’s little new inventory in the pipeline, with construction starts at historically low levels. Second, despite high unemployment levels, there has been some growth in the office sector with professional and business service firms and the government adding jobs. “From a commercial real estate perspective, as long as you have any net job growth, it is eating away at the vacancies out there,” Florance said.

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